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China eases rules on foreign investment in the real estate market

To boost the real estate market in the current economic slowdown, the Chinese government recently issued the Notice Adjusting Policies on the Access and Administration of Foreign Investment in the Real Property Market which came into effect on 19 August 2015 (Notice 122). This Notice 122 relaxes a number of restrictions on foreign investment in the real estate sector which were first introduced in 2006.

Lowering the Equity-to-debt Ratio

Under PRC law, any foreign-invested enterprise (FIE) is subject to a mandatory ratio between its registered capital amount and the amount of total investment. Such ratio determines an FIE's capability of borrowing foreign loans. For an ordinary FIE, the ratio varies between 1/3 to 70 percent depending on the total amount of investment. In 2006, as a measure to curb the then overheated real estate market, Chinese government promulgated a Circular 171 (Circular 171) which imposed a much higher ratio on foreign-invested real estate enterprises (Real Estate FIE) – its equity must be at least 50 percent of its total investment if the latter exceeds USD10 million. Now, such restriction is removed by Notice 122 – Real Estate FIEs may enjoy the same equity-to-debt ratio as other FIEs and will have a lower level of equity and a higher level of leverage.

Facilitating the Obtaining of Loans

According to Circular 171, a Real Estate FIE must satisfy the following requirements before it may borrow domestic loans or foreign loans or convert foreign exchange loans into Renminbi: (1) its registered capital has been fully paid; (2) it has obtained the land use right certificate; and (3) funds injected in the real estate project has reached 35 percent of the project's total investment amount. Now, Notice 122 provides more flexibility by removing the first requirement on full payment of registered capital, i.e., as long as conditions (2) and (3) are satisfied, the Real Estate FIE is eligible to obtain loans.

Nevertheless, Notice 122 fails to address a major practical hurdle that Real Estate FIEs face when seeking foreign loans – according to relevant regulations issued by the State Administration of Foreign Exchange (SAFE), any Real Estate FIE approved and registered with the Ministry of Commerce on or after 1 June 2007 is not permitted to register its foreign debts with SAFE. Such restriction is not changed by Notice 122. Therefore, unless SAFE makes further clarifications on this point, the benefits and flexibility brought by Notice 122 will be limited for Real Estate FIE obtaining financing.

Easing Purchase of Real Estate Properties by Foreign Individuals

The Notice 122 also makes it easier for foreign individuals who intend to purchase real estate in China for their own use. Previously under Circular 171, only foreign individuals who have been studying or working in China for more than one year are allowed to purchase real estate – such one-year limit is now lifted by Notice 122. It is worth noting that purchase of real estate must still be for the foreign individuals' own use and be subject to relevant restrictive policies on real estate purchase as implemented by the municipal government of the city where such property is located.

Simplifying Foreign Exchange Registration Procedure

As a continuing policy to simplify foreign exchange registration formalities, Notice 122 provides that for foreign exchange registration of direct investment matters, Real Estate FIEs no longer need to register with SAFE; instead, they may complete such formalities with the relevant handling bank. Such change is in line with earlier reforms launched by SAFE which applies to all FIEs.

Our Observations

Since 2006, the Chinese government has tightened its policies on foreign investment in the overheated real estate market. However, with the country's economy slowing down in recent years and the depreciation of the Renminbi, the issuance of Notice 122 seems to signal a change in government policymaking in this sector. The relaxations brought by Notice 122 will no doubt facilitate foreign investors investing in the Chinese real estate market; however, whether Real Estate FIE can substantially benefit from the new policies, especially in relation to its capability to obtain foreign loans, further clarifications or implementing rules will need to be issued by the government.